16-03-2020

Entry Decisions & FDI

International Business

In this Session

Entry Modes

FDI - Forms & Types

FDI - Cost & Benefit to Host country

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International Business
Entry Modes
❑ Firms can use nine different methods to enter
a market
❖ Exporting
❖ Turnkey Projects
❖ Licensing
❖ Franchising
❖ Joint Ventures
❖ Wholly Owned Subsidiaries
❖ Acquisition
❖ Greenfield ventures
❖ Strategic Alliances

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International Business
Entry Modes
❑ Firms can use nine different methods to enter
a market
❖ Exporting
❖ Turnkey Projects
❖ Licensing
❖ Franchising
❖ Joint Ventures
❖ Wholly Owned Subsidiaries
❖ Acquisition
❖ Greenfield ventures
❖ Strategic Alliances

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International Business
Exporting
❑ Advantages:
❖ Avoids cost of establishing manufacturing operations
❖ May help achieve experience curve and location
economies
Initially exported to Latin America Initially exported to India from US

❑ Disadvantages:
❖ May compete with low-cost location manufacturers
❖ Possible high transportation costs
❖ Tariff barriers
❖ Possible lack of control over marketing executives/
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International Business

Turnkey projects
❑ Advantages:
❖ Can earn a return on knowledge asset
❖ Less risky than conventional FDI
❑ Disadvantages:
❖ No long-term interest in the foreign country
❖ May create a competitor
❖ Selling process technology may be selling competitive advantage as well

BecRel Engineering
Pvt. Ltd.

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International Business

Licensing and Franchising

❑ Are market expansion alternatives used by all
types of firms, large and small
❑ They offer flexibility and reflect the needs of
the firm and the market

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International Business
Licensing
❑ Licensing agreement
❖ One firm (the licensor) permits another to use its
intellectual property, brand or design in exchange for
compensation designated as a royalty
❖ The recipient firm is the licensee

Dr Reddy's Laboratories licensed anti-diabetic Merck & Co Inc licensed its experimental psoriasis
molecule, DRF 2725 (Ragaglitazar), to Novo Nordisk. drug to Indian generic maker Sun Pharmaceutical
Industries Ltd for $80 million.

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International Business

Licensee in India for the following brands

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International Business
Licensing
❑ Advantages of Licensing
❖ Low management time
❖ Knowledge of markets/ marketing strength is not required
❖ Additional return on R&D investments through royalty
❖ Reduces the risk of R&D failures, the cost of designing around the
licensor’s patents, or the fear of patent infringement litigation
❖ Reduces the exposure to government intervention
❖ Allows a firm to test a foreign market without major investment
❖ Preempts a market for competition, especially if the licensor’s
resources permit full-scale involvement only in selected markets
❖ Increases global protection of intellectual property rights

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International Business

Licensing
❑ Disadvantages of licensing
❖ Licensor gets limited expertise
❖ Licensor creates its own competitor
❖ Allows multinational corporations (MNCs) to capitalize on
older technology
❑ Trademark licensing
❖ Permits use of the names or logos of designers, literary
characters, sports teams, and movie stars on merchandise
❖ Fees can range between 7 and 12 percent of net sales for
merchandising license agreements

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International Business

Franchising
❑ A situation under which a parent company
(the franchiser) grants another
independent entity (the franchisee) the
right to do business in a specified manner
❑ The franchisee benefits from the reduced
risk of implementing a proven concept
❑ Reasons for the international expansion of
franchise systems:
❖ Market potential
❖ Financial gain
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International Business

Franchising – Major forms

❑ Manufacturing franchise
❖ franchisor allows a manufacturer to produce and
sell products using its name and trademark.
❑ Product franchise
❖ manufacturers allow retailers to distribute
products and use names and trademarks.
❑ Business format franchise
❖ franchisor provides the franchisee with an
established business, including name and
trademark, for the franchisee to run
independently.
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International Business

Key differences between Licensing

and Franchising
In franchising
❖ The supply of goods and/or services is under a
process, system or marketing plan,
❖ The business is substantially associated with a
trade mark, advertising or commercial symbol

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International Business

Joint Ventures
❑ Advantages:
❖ Benefit from local partner’s knowledge
❖ Shared costs/risks with partner
❖ Reduced political risk
❑ Disadvantages:
❖ Risk giving control of technology to partner
❖ May not realize experience curve or location economies
❖ Shared ownership can lead to conflict

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International Business

Wholly Owned Subsidiary

❑ Subsidiaries could be Greenfield investments or
acquisitions
❑ Advantages:
❖ No risk of losing technical competence to a competitor
❖ Tight control of operations
❖ Realize learning curve and location economies
❑ Disadvantage:
❖ Bear full cost and risk

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International Business

Acquisitions Pros and Cons

❑ Pros ❑ Cons
❖ Quick to execute ❖ Disappointing results
❖ Preempt competitors ❖ Overpay for firm
❖ Possibly less risky ❖ Optimism about
value creation
❖ Culture clash
❖ Problems with
proposed synergies
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International Business

Greenfield Ventures Pros and Cons

❑ Pros ❑ Cons
❖ Can build subsidiary ❖ Slow to establish
it wants ❖ Risky
❖ Easy to establish ❖ Preemption by
operating routines aggressive
competitors

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International Business

Acquisition or Greenfield
❑ Acquisitions are
attractive if:
❖ There are well
established firms already
in operation
❖ Competitors want to
enter the region
❑ Greenfield ventures are
attractive if:
❖ There are no/ less
competition
❖ Companies have a
competitive advantage
that consists of
embedded
competencies, skills,
routines, and culture

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International Business

Strategic Alliances
❑ Cooperative agreements between potential or actual
competitors. Strategic Alliances are formed due to:
❖ High cost of technology development
❖ Company may not have skill, money or people to go it
alone
❖ Good way to learn
❖ Good way to secure access to foreign markets
❖ Host country may require some local ownership

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International Business

Strategic Alliances
❑ Advantages:
❖ Facilitate entry into market
❖ Share fixed costs
❖ Bring together skills and assets that neither company has
or can develop
❖ Establish industry technology standards

❑ Disadvantages:
❖ Competitors get low cost route to technology and markets

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International Business

Global Alliances are Different

❑ Firms join to attain world leadership
❑ Each partner has significant strength to bring to the
alliance
❑ A true global vision
❑ Relationship is horizontal not vertical
❑ When competing in markets not part of alliance,
they retain their own identity

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International Business

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International Business

FDI Inflows (US $ Billion)

Year India China
2010 37.7 131.1
2011 34.8 243.7
2012 46.6 280.1
2013 34.3 241.2
2014 36 290.9
2015 45.1 289.1
2016 44 287.6
2017 40 240
2018 38 NA
Source:
DIPP
World Bank
UNCTAD Report

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International Business

Why FDI?
GE to invest $ 200 Mill to build a plant
to manufacture 1000 locomotives
❑ When exporting is not feasible due to the following
conditions:
❖ Production abroad is cheaper than at home
❖ High transportation costs
❖ Companies lack domestic capacity
❖ Products and services need to be altered substantially
❖ Trade restrictions do not allow import of products
❖ Buyers prefer products manufactured in their country

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International Business Master

franchisee
Why FDI? in India

❑ When licensing is not feasible

due to the following conditions:
❖ Giving away valuable technological
know how to a potential
competitor
❖ Does not give control over
manufacturing, quality, marketing Invested over Rs.350 Cr in India
etc.
❖ Competitive advantage is based on
management, marketing and
manufacturing

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International Business

Forms of FDI
❑ Greenfield operation

❑ Mergers and acquisitions

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International Business

Benefits of FDI to Host Countries

❑ Resource-transfer effect
❖ Capital
❖ Technology
❖ Management
❑ Employment effect – Direct & Indirect
❑ Balance-of-Payments effect
❑ Effect on competition and economic growth

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International Business

Costs of FDI to Host Countries

❑ Adverse effects on competition
❑ Industry dominance
❑ Technological dependence
❑ Cultural Change
❑ Adverse effects on the balance of payments
❖ After the initial capital inflow there is normally a
subsequent outflow of earnings
❖ Foreign subsidiaries could import a substantial number
of inputs
❑ National sovereignty and autonomy

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International Business
Host Country Policies and FDI
❑ Key depts. Involved in FDI in India
❖ Department for Promotion of Industry &
Internal Trade (earlier called DIPP - Dept. of
Industrial Policy & Promotion – Ministry of
Commerce)
❖ Formulation of FDI policy and promotion, approval
and facilitation of FDI;
❖ Respective Ministries and Cabinet Committee
(in select cases)

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International Business
To recap
❑ Entry modes ❑ Foreign Direct Investment
❖ Exporting ❖ Forms & Types
❖ Turnkey Projects ❖ Cost & Benefit to Host country
❖ Licensing ❖ Host Country Policies of FDI
❖ Franchising
❖ Joint Ventures
❖ Wholly Owned Subsidiaries
❖ Acquisition
❖ Greenfield ventures
❖ Strategic Alliances

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